Step 1 The Retirement Success Process: Investment and Risk Management

Refined Retirement Planning:

Mark Elliott: Welcome back to The Retirement Income Show. I’m Mark Elliott, here with the CEO and founder of Oak Harvest Financial Group.

We’re talking about the Retirement Success Plan. Once it’s in place, it’s not done, it’s not finished. It’s always changing and evolving with you and your life. So it’s really important to get this in place, to have a plan, to give you more confidence and be more comfortable in retirement with maybe hopefully not so much stress about where you are.

Again, that number is 800-822-6434 to learn more, 800-822-6434. Troy is breaking down what is exactly the Retirement Success Plan. It starts with the investment plan, then it’s the income plan, then it’s a tax plan, then it’s the health plan, and then it is the estate plan.

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Troy Sharpe: I want to tie together why that sequence is important just briefly. If you don’t have a proper risk management structure in place, obviously you open the potential for losses beyond your willingness to stay the course. Now, it does not just stay the course with the investments, it stays the course with your Retirement Success Plan, with your financial plan.

We have to define what those guardrails are first, this is the process of understanding where your risk limitations are. If you think about it, you’re going down a highway, and of course, you have guardrails on each side, and if you go off the highway, those guardrails are there to protect you from going into the opposing direction on the freeway.

Now in retirement, when we’re talking about managing risk when we can identify these emotional guardrails. Are you willing to see– and I like to define risk in terms of dollars, not percentages, and I’ll tell you why in a minute. Let’s say you have a million dollars saved for retirement. If all that money is in your 401(k), first and foremost, we have to realize that it’s not really a million dollars, because every dollar in there is tax deferred.

We have to understand, we’re going to address that as part of this process, but when we talk about risk, we have to understand that not all of those dollars are yours. You have a junior partner on that account, we want to keep them a junior partner, we don’t want Uncle Sam to become a senior partner or a majority share owner of your retirement account. Just understanding that not all that money is yours and that you do have a junior partner in that account, it ties into this risk management discussion a little bit.

Risk Management:

When we talk about risk in terms of dollars, are you willing to see your account go down $200,000? Just a question. Could be yes, or could be no.

There is no right or wrong answer. By asking these questions, we can start to define where your emotional guardrails are. Because the number one thing that you can do when it comes to ruining a financial plan or retirement plan is to have more risks and your accounts go down more than you can mentally tolerate and emotionally withstand, and then you sell, get out, sit in cash for two or three years, miss the rebound, and now you’re in a bad, bad, bad spot.

I can’t tell you– we’ve been through this so many times with clients and conversations about, “Troy, I’ve been watching the news. I think we’re going into a recession. We need to get out of the market.” “We need to do this.” Or “My accounts are down 10%” or “20%,” or “When COVID hit.” A proper plan accounts for the markets being down 20% or 30%.

When we talk about risk management, and we’re asking you these questions, the reason why is that we’re already planning for recessions. We’re planning for potential market crashes. This is part of life.

We cannot avoid these things unless we completely stay in cash. If that’s the case, you might as well bury the money in the backyard and just spend whatever you can and hope you don’t run out and eat rice and beans for retirement. That’s not how most of our clients– that’s not how most of you want to spend, after working for an entire career, you want to spend your life.

Are you okay with a $200,000 decline? By the way, which is 20%. The reason why I define it in terms of dollars is that a long time ago, I had a client come in, Well, he was a prospective client at the time, and like most financial advisors, we would talk about it in terms of percentages, and we said, “Are you okay with a 10% or a 20% decline?”

He said, “You know what, 20%’s pretty much my max.” He had around a million dollars. Then I just happened to put it in terms of dollars. I said, “Okay, so if your accounts go down $200,000, you’re okay with that?” He said, “No, Troy, I would fire you on the spot.”

That, for me, it connected a big dot. It was kind of a big evolution in my career when I was younger because I realized I am a financial guy. I do this every single day. I think in terms of percentages and statistics and– but most people think in terms of dollars. When we ask you that question, you say, “Yes, I’m okay with a $200,000” or a $100,000 or maybe it’s not even close to that, or maybe it’s much, much, much more.

What that does for us is it helps to define what type of portfolio we need to construct. Emotionally, there’s a small probability that it is going to hit your downside guardrail. If we can go through retirement and not ever hit that downside guardrail, well, there’s a very good chance from our experience that you’re going to stay the course. You’re going to stick with your plan.

If you can stick with your plan, you have a much higher probability of success in retirement. This is why we call it the Retirement Success Process. This is why we call it a Retirement Success Plan. This is what we want to deliver to you.

So now, I said I wanted to talk a little bit about the sequence and why risk management and investment planning come first. In most simple terms, if your money– let’s say you have $1 million and you never had to take anything out if you average 4% versus 9% at higher rates of return, you obviously can expect your accounts to grow to a larger value. That means income planning is impacted.

That also means that now your tax planning is impacted. So we can’t build an income plan or a tax plan without first understanding an estimated reasonable expected return for a combination of securities inside a portfolio.

Step one has to be this risk management discussion, which then can lead us to the investment construction of your portfolio, which then gives us a pretty good idea of expected return, upside downside deviation. We can now start talking about income planning. We can actually project and do a sensitivity analysis on tax planning based on different account levels.

Let me break that down for you before we get into the tax planning section later on in the show. If you have $1 million in your IRA, you are forced to start taking a certain percentage out. It’s around 4% at age 72. As you get to 74, 76, 77, you’re required to distribute a larger and larger percentage.

If your million grows to $1.5, you take, let’s say 4% of that out. That’s a number that is less than if your IRA grows to 2 million. The more aggressive your portfolio is, or the higher the expected return, the more we should anticipate that required minimum distribution being a larger number. That RMD is the amount you’re forced to take out and pay taxes on.

Tax form 1040 with notepad and text tax time, pen and calculator

We’ve seen clients– I’d like to phrase this for prospective clients because we address this with you as a client. This is part of the retirement success process and the Retirement Success Plan.

So often when someone comes in here and they’ve done a pretty good job saving, they have $800,000, they have $1 million, they have 2 or $3 million, when we start to do this analysis, if you don’t address this tax problem and it is a tax problem, it can be a tax nightmare for many of you, those RMDs when we get out to be 75 and 77 or 78, $100,000, $150,000, $200,000, now you’re taking that money out.

You’re probably not spending that much. On top of social security, on top of any rental income or real estate income or pension or dividend or interest or any other income that you have outside of your retirement account.

We’ve seen many people be in a much higher tax bracket and have much more income in their 80s than they ever had throughout their entire life up to that point. It’s because of a lack of planning. That’s what we’re trying to get ahead of. We have to understand the risk structure of our portfolio and how we manage that risk so we can keep you on course. We can keep you on schedule with your plan. That then gives us an idea of a range of expected returns based on basic financial planning concepts.

From there, we can develop that income strategy. Income is not just social security, it’s not just how much to take out. Don’t get me started on the 4% rule, but it is also from which accounts.

Then we get into the taxes. If you don’t have a Retirement Success Plan, give us a call, 1- 800-822-6034. We’re going to walk you through this process. If you become a client, you will have this plan in place that deals with risk, investments, taxes, and income, along with the rest of the Retirement Success Plan. 1-800-822-6434. Oak Harvest Financial Group. Check out the website. Check out the YouTube channel, Oak Harvest Financial Group.


Mark: We’re talking about the Retirement Success Plan. Troy’s still got a lot to get to, stay with us. We’re back in one minute. Investment advisory services are offered through Oak Harvest Financial Group, LLC. Oak Harvest Financial Group is an independent financial services firm that helps people create retirement strategies using a variety of insurance and investment products.

Investing involves risk, including the loss of principal, any references to protection benefits, or lifetime income, generally referred to as fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Oak Harvest Financial Group LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. You should speak to a qualified professional before making any decisions about your personal situation. We are not affiliated with the US government or any governmental agency. This radio show is a paid placement.